Zynga in a pinch as Facebook gaming shifts

Growth slows while remaining players move to new social genres

DanGallagher

SAN FRANCISCO (MarketWatch) — A shift in game-playing habits on Facebook has left Zynga Inc. in a pinch, as the social game maker struggles with the slowdown of a popular format it helped to pioneer.

David Weidner/MarketWatch

Zynga Inc. shares have fallen below the level of the cash on the company’s balance sheet, including the value of its San Francisco headquarters.

That much became clearer late Thursday, after Zynga
ZNGA, +0.40%
issued its second consecutive downgrade of its annual bookings forecast. Investors punished the already-battered stock hard, pushing the shares down nearly 18% to $2.33 by early afternoon, a new low for a stock already down more than 80% from its high in March, and below even the estimated book value for the shares. See: Zynga's game business now valued at zero by investors

The San Francisco-based company was an early mover into the social games space, with titles such as “FarmVille” and “CityVille” pulling in millions of players, some of whom would purchase items in the game that made up the bulk of Zynga’s revenue base.

But the genre appears to be struggling. Zynga said Thursday that its lowered forecast was primarily the result of weakness in its “invest and express category,” which includes the “FarmVille franchise as well as the recently launched “The Ville” title. See: Zynga crashes after cutting outlook

The company also reduced its forecast in its second-quarter report issued late July, citing similar dynamics. At the time, Zynga pointed to technical changes made by Facebook
FB, -1.26%
that made it harder to drive traffic to some of its older titles.

After the latest warning, analysts are more convinced that Zynga’s core offerings are losing their appeal — with some questioning the overall health of the Facebook gaming segment. And while Zynga has been investing in building up a mobile game business, the growth there has not yet been enough to offset weakness in its main category of Facebook games.

“These issues started to become clear in Facebook’s Q4 numbers last year, which showed a decline sequentially in credits revenues,” said Colin Sebastian of Robert W. Baird in an interview. Sebastian downgraded Zynga to a neutral rating on Friday morning following the warning.

“I think it’s a combination of app fatigue, for ‘Ville’ type games, and also the natural expansion of games on smartphones and tablets,” he said of Zynga’s slowing business. “Zynga is trying to leverage itself to this transition, but unsurprisingly it can be very painful.”

Atul Bagga of Lazard Capital also points to a trend towards new types of genres in social gaming, including a rise in “casino and hardcore games” on the platform.

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In a report earlier this week, Bagga noted data indicating that 16 casino games and 7 strategy games were in the list of top 50 grossing apps on Facebook for the month of September, a higher representation for both genres from the month before.

“Interestingly, of these, only 5 casino and 2 strategy games made it into the top 100 apps by DAU [daily active users] on Facebook, reflecting significantly higher monetization of these games versus other genres,” he wrote.

Some analysts believe that Facebook itself is seeing a decline in usage — despite the fact that the social network just topped the 1 billion mark in its total user base. Pacific Crest wrote in a report Friday that its own proprietary survey indicated that “users are using Facebook less compared to six months ago,” which may spark more efforts from the company to make money from its user base.

“We believe this is due to three main reasons: users are playing games less, the shift to mobile, and ‘social leakage,’ leading to users posting updates less and, in turn, a lower-quality news feed,” the broker wrote.

Facebook shares came down more than 2% as well, as some brokers clipped their projections for transaction revenue that comes largely from Zynga.

“The scale and speed of social gaming’s decline suggests a reverse network effect,” wrote Michael Olson of Piper Jaffray. “Modest user churn and engagement erosion likely accelerated during the spring and has continued to date.”

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